The Concept of Insuring Deposits

Narendra Kumar

28 May, 2019

What is the Concept of Insuring Deposits?

The notion of ensuring deposits kept with banks was discussed and considered on various occasions but it was only in 1961 when the Deposit Insurance Corporation (DIC) Bill was introduced in the Parliament on August 21, 1961. Insuring Deposits Thereafter it was passed by the Parliament and the Bill got the assent of the President on December 7, 1961. The Deposit Insurance Act, 1961 came into force on January 1, 1962.

Initially, the Insuring Deposits Insurance Scheme was extended only to functioning commercial banks. This included the State Bank of India and its subsidiaries, other commercial banks and the branches of the foreign banks operating in India. With the enactment of the Deposit Insurance Corporation (Amendment) Act, 1968, the ‘Corporation’, under the provisions of Section 13 A of the Act, had to bring the ‘eligible co-operative’in its cover as insured banks. An eligible co-operative bank meant a co-operative bank, be it a State co-operative bank, a Central co-operative bank or a Primary co-operative bank, in a State that has passed the enabling legislation amending its Co-operative Societies Act.

Insuring Deposits insurance was introduced to shield the depositors, particularly the small ones, from the risk of loss of their savings due to failures on the part of the banks. The aim was to avoid panic and to ensure stability and growth of the banking system.e; to promote financial stability.

What was the idea behind Credit Guarantee Cover?

The Government of India, in consultation with the Reserve Bank of India, further introduced a Credit Guarantee Scheme in July 1960. Through this, the RBI, acting as an agent of the Central Government, was vested with the duty of administration of the Scheme and was designated as the Credit Guarantee Organization (CGO) for guaranteeing the advances granted to small-scale industries by Banks and other Credit Institutions. Further, in 1971, the Reserve Bank of India by promoting a Public Limited Company named it Credit Guarantee Corporation of India Ltd. (CGCI). The establishment of the Credit Guarantee Schemes was:

1. Aimed at meeting the credit needs of the neglected sectors which were not considered to be creditworthy,
2. Aimed to persuade banks to make available credit to the clients from the weaker sections,
3. to encourage the commercial banks to meet such loans which were considered to be unaccountable, particularly those sections of the society engaged in non-industrial activities,
4. By providing a guarantee cover to the loans and advances granted to small-time needy borrowers which come under the priority sector.

Why was the scheme of Deposit Insurance merged with Credit Guarantee?

In 1978, the DIC and the CGCI were unified to form the Deposit Insurance and Credit Guarantee Corporation (DICGC), the title was changed to the Deposit Insurance and Credit Guarantee Corporation Act, 1961.
Deposit Insurance and Credit Guarantee Corporation (DICGC), established on 15 July 1978, acts as a subsidiary of Reserve Bank of India.
The amalgamation was made with a view to integrating the functions of Insuring Deposits insurance and credit guarantee to meet the changing financial needs.
After the merger, the primary focus of the DICGC was on credit guarantees which can be witnessed by the fact that most large banks were nationalized.
The credit guarantees were then gradually phased out and the focus was shifted onto its core function of Deposit Insurance with the objective of avoiding panics in the market, reduce risk, and promoting financial stability.

The following changes were further introduced:

1. With effect from April 1, 1981, the DICGC extended its guarantee cover to credit and advances granted to small-scale industries also.
2. With effect from April 1, 1989, the DICGC extended its guarantee cover was to the entire priority sector advances, as covered by the definition provided by the Reserve Bank of India.
3. With effective from April 1, 1995, the DICGC housing loans have been excluded from the guarantee cover.

Which banks are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC)? 

1. All commercial banks which also includes local area banks, regional rural banks and branches of foreign banks that function in India.
2. All the eligible Central, State and Primary Cooperative banks, functioning in States/ Union Territories (those which have passed the enabling provision). At present all co-operative banks are covered by the DICGC. Primary cooperative societies are not insured by the DICGC.
   • The list of insured banks, the contact details of such banks and the de-registered banks is available on the official site of DICGC
   • The DICGC furnishes the insured banks with printed leaflets giving information relating to the protection afforded by the Corporation to the depositors.
   • If in doubt, the depositor can either make a specific inquiry at the branch office or visit the official site.

What does the Deposit Insurance and Credit Guarantee Corporation (DICGC) Insure and what is the maximum limit of such Insurance?

The DICGC insures all deposits such as savings, current, fixed, recurring, etc. deposits except the following types:

1. Deposits of foreign Governments;
2. Deposits of Central/State Governments;
3. Deposits with the State co-operative bank relating to the State Land Development Banks;
4. Inter-bank deposits;
5. Any amount due on account of any deposit received outside India
6. Any amount specifically exempted by the DGCGI with the previous approval of RBI

What are general guidelines for Insured Deposits?

• A depositor in the bank is insured up to a maximum of Rupees One Lakh, adding the principal and interest amount held by him, as on the date of liquidation/cancellation of bank’s license or the date on which the scheme of reconstruction/amalgamation/merger comes into force.
• The deposits with different branches of the same bank are aggregated and a maximum amount to be paid is Rupees one lakh.
• For funds held in the same type of ownership at the same bank, deposit insurance coverage limit is applied are added together before deposit insurance is determined.
• If the funds are in different types of ownership, they would then be separately insured.
• When the deposits are with more than one insured bank, deposit insurance coverage limit shall be applied separately to the individual deposits in each bank.
• The bank deducts the number of dues payable by the depositor before paying the cover amount.
• The bank entirely bears the deposit insurance premium and cost involved.

In which events is the Deposit Insurance and Credit Guarantee Corporation (DICGC) liable to pay?

1. When a bank goes into liquidation, the DICGC is liable to pay to the depositors, the amount of his deposit (up to Rupees one lakh), through an appointed liquidator within two months from the date of receipt of claim list from the liquidator.
2. When a bank is reconstructed or merged/ amalgamated with another bank, the DICGC has to pay the insured bank, the difference between the full amount of deposit or the limit of insurance cover (whichever is less) and the amount received under the reconstruction/ amalgamation scheme. This has to be paid within two months from the date of receipt of claim list.

What is the Procedure of Premium Payment by Banks?

The Insured banks have to make a premium payment to DICGC on its total Insuring Deposits within two months. In event of a delay, banks are liable to pay penal interest at 8 percent above the Bank rate from the beginning of the financial half year till the date of payment. Hence, it is in bank’s own interest to pay the premium within due date so that payment should reach to DICGC within the stipulated dates.

What is the Provision of Complaint Redressal top DICGC?

Any person who has a grievance against any the Corporation may lodge his complaint to the Complaints Redressal Cell, details to which are provided on the site. The complaint should mention the details of the complainant, the department against which complaint is being made and the fact of the complaint supported by the documents relied upon by the complainant, if any. Members of the public can also approach the designated officers as mentioned on the site.

Also, The Insuring Deposits Insurance and Credit Guarantee Corporation (DICGC) is a public authority, thus falls under the ambit of the Right to Information Act, 2005. Thus, DICGC is obliged to provide information to members of the public upon being asked for certain categories of information to be exempt from disclosure as per the RTI Act.